Buchler and another (as joint liquidators of Leyland Daf Ltd) (Respondents) v Talbot and another (as joint administrative receivers of Leyland Daf Ltd) and Stichting Ofasec (Appellants) and others
40. In reaching this decision the Court of Appeal, as they were bound to do, followed the reasoning of the Court of Appeal (Lord Denning MR, Sachs and Phillimore LJJ) in In re Barleycorn Enterprises Ltd, Mathias and Davies (a Firm) v Down  Ch 465. In that case the charge did not crystallise until the company was ordered to be wound up and no receiver was ever appointed, so that the assets in question, though subject to the floating charge, remained under the control of the liquidator. The Court of Appeal decided that in such a case the expenses of the winding up are payable out of the assets subject to the charge in priority to both the preferential creditors and the claims of the charge holder. In the present case the charge holder appointed receivers who collected and realised the assets subject to the floating charge and paid the preferential creditors before the commencement of the winding up. The earlier decision is thus technically distinguishable; but it cannot sensibly be distinguished, for its rationale applies as much to the one situation as to the other. The question for the House, therefore, is whether Barleycorn was rightly decided.
41. As formulated, the question appears to be concerned with priorities. But the real question is whether the expenses of a winding up are payable out of charged assets at all. If they are, there is no doubt that they are payable in priority to the claims of the charge holder. If they are not, questions of priority do not arise.
42. The facts are not in dispute. They are set out in full in the judgment of Rimer J reported at  BCLC 419 at pp 420-422 and may be briefly summarised. The company in liquidation is Leyland Daf Limited ("the Company"), an English company and a member of a Dutch group of companies. In 1992 the company issued debentures which contained a floating charge over the whole or substantially the whole of its undertaking. In the following year the group collapsed and the charge holder appointed joint administrative receivers ("the receivers"). On their appointment the floating charge crystallised into a fixed charge. The receivers proceeded to realise the assets comprised in the charge and paid the debts (amounting to some £8m) which were preferential in the receivership. They also made interim distributions of some £110m to the charge holder towards satisfying the secured indebtedness. At the time of the hearing before Rimer J the receivers still held some £61m derived from the assets that were subject to the charge. That figure has since increased (with interest and other realisations) to some £72m.
43. On 24 July 1996, that is to say more than three years after the Receivers' appointment, the company went into creditors' voluntary liquidation and the respondents ("the liquidators") were appointed joint liquidators.
44. Liquidation expenses to date, including the liquidators' remuneration and corporation tax, amount to over £9.5m before VAT and interest on overdue accounts. This figure does not include any provision for future costs of the liquidation, which are unquantifiable but are said to be likely to exceed £1m. The liquidators have been able to realise only some £1.4m. Furthermore proceedings are still pending in the Netherlands which may have the result that the charged assets are insufficient to meet the claims of the secured creditors. There are thus likely to be insufficient free assets to meet the expenses of the liquidation, and unless the charged assets are available to pay them in priority to the claims of the charge holder there will be nothing with which to pay the greater part of the costs of winding up the Company.
45. In these circumstances the liquidators have sought and obtained from the courts below a declaration that the liquidation expenses are payable out of the charged assets in the receivers' hands in priority to the claims of the secured creditors.
46. Two matters should be mentioned at this point. First, the liquidators make no claim to money which was distributed by the receivers to the charge holder before the commencement of the winding up. Secondly, the present proceedings raise a question of principle. They are not concerned with the propriety or proper amount of any particular sum claimed to be an expense of the liquidation.
The current statutory provisions
47. The question turns on the proper construction of sections 40(2) and 175(2)(b) of the Insolvency Act 1986 ("the 1986 Act"); although of these only section 40 is strictly applicable. Sections 40 and 175 of the 1986 Act are in the following terms:
48. Section 40 is contained in Part III of the Act which forms part of a group of sections headed "Provisions applicable to every receivership." It contains no reference to the expenses of the winding up, which would be out of place in a section dealing with receivership. Section 175 is contained in Part IV of the Act and forms part of a group of sections headed "Provisions of general application in winding up." Subsection (2)(a) contains a reference to the expenses of the winding up but only to confirm their priority over the preferential debts when these are being paid in the winding up. Both sections are concerned exclusively with the priority of preferential debts, one in a receivership, where they are given priority to the claims of the charge holder, and the other in a winding up, where they are postponed to the expenses of the winding up but are given priority to the claims of the charge holder.The legislative history
49. The relevant statutory provisions have a long history, having been introduced in two stages towards the end of the 19th Century and successively re-enacted in later Acts in substantially similar terms. At the first stage a class of unsecured debts was given priority in a winding up. At the second stage such debts were made payable so far as necessary out of the assets comprised in a floating charge (but not out of the assets comprised in a fixed charge) in priority to the claims of the holder of the charge.
50. Provision for the preferential payment of wages and salaries due to certain classes of employees was introduced in personal bankruptcy in 1825 and was extended to the winding up of companies by the Companies Act 1883 ("the 1883 Act"). Section 4 of the 1883 Act provided that
certain categories of debts should be paid in priority to others. Section 5 provided that such debts should rank equally among themselves and be paid in full unless there were insufficient assets to meet them, in which case they should abate in equal proportions among themselves. Section 6 made it clear that payment of the costs and expenses of the winding up took priority over the preferential debts. These sections were re-enacted in the like terms by section 1 of the Preferential Payments in Bankruptcy Act 1888 ("the 1888 Act").
51. Bankruptcy and companies liquidation are concerned with the realisation and distribution of the insolvent's free assets among the unsecured creditors. They are not concerned with assets which have been charged to creditors as security, whether by way of fixed or floating charge. Secured creditors can resort to their security for the discharge of their debts outside the bankruptcy or winding up. Assets subject to a charge belong to the charge holder to the extent of the amounts secured by them; only the equity of redemption remains the property of the chargor and falls within the scope of the chargor's bankruptcy or winding up. As James LJ observed in In re Regents Canal Ironworks Co, Ex p Grissell (1877) 3 Ch. D. 411, 427 charge holders are creditors
Such a creditor is a person who
per James LJ in In re David Lloyd & Co. (1877) 6 Ch. D. 339, 344.
52. The 1883 and 1888 Acts were concerned with the distribution of "the assets of any company being wound up". They were not concerned with assets to the extent to which they belonged to secured creditors, and accordingly did not affect assets over which the company had given a charge whether fixed or floating. Preferential creditors were thus given priority over other unsecured creditors in the distribution of the company's free assets, but like them were postponed to the expenses of the winding up and had no right to be paid out of any charged assets.
53. After several successive re-enactments these provisions are now reproduced in sections 175(1) and (2)(a) of the 1986 Act where the language has been modernised but (save for the definition of "a floating charge") without effecting any change of substance. Section 175(1) opens with the words "In a winding up" and like their predecessors subsections (1) and (2)(a) are concerned with the distribution of the assets in a winding up, that is to say with the distribution of the company's free assets after the costs and expenses of the winding up have been paid or provided for.
54. It would clearly have been inappropriate to allow unsecured but preferential debts to be paid out of assets charged by way of fixed charge in priority to the claims of the holder of the charge. This would have been an unwarranted interference with the property rights of the charge holder. By making it very difficult for businesses to raise money on the security of their assets it would also have been contrary to the interests of both lenders and borrowers. But the development of the floating charge, which enabled a company to grant a charge over the whole or substantially the whole of its undertaking, and which was still of recent origin in 1883, changed the picture. The existence of a floating charge deprived the preferential creditors of much of the benefit which the 1883 and 1888 Acts were intended to give them. It enabled the charge holder to withdraw all or most of the assets of an insolvent company from the scope of the winding up and leave the liquidator with little more than an empty shell and nothing with which to pay preferential debts. Accordingly the Preferential Payments in Bankruptcy (Amendment) Act 1897 ("the 1897 Amendment Act") made the preferential debts payable if and so far as necessary out of the proceeds of a floating charge in priority to the debt secured by the charge.
55. The 1897 Amendment Act did not affect the operation of the 1888 Act in any relevant respect. The 1888 Act continued to govern the payment of preferential debts out of the assets comprised in the winding up. What the 1897 Amendment Act did was to allow the preferential creditors recourse if necessary to a further source for payment of their debts, viz the assets comprised in a floating charge. Section 2 applied in a winding up (whether or not there was also a receivership). Section 3 applied in a receivership (but only if the company was not in the course of being wound up at the relevant date).
56. Section 2 of the 1897 Amendment Act provided that in the winding up of a company the preferential debts should, so far as the assets of the company available for payment of general creditors were insufficient to meet them, have priority over the claims of holders of any floating charge and be paid accordingly out of the property comprised in such charge. This later became section 319(5) of the Companies Act 1948 ("the 1948 Act") and is now section 175(2)(b) of the 1986 Act.
57. It is necessary to appreciate what section 2 of the 1897 Amendment Act and its successors did and, even more importantly, what they did not do. They applied in the winding up of a company where the assets available for payment of general creditors were insufficient to meet the preferential debts in full. So the assets available for payment of general creditors in a winding up remained the primary source of payment of the preferential debts. Such assets do not include charged assets, which are not available for payment of the general body of creditors until the claims of the charge holder have been satisfied. They are what remains of the company's free assets after the expenses of the winding up have been paid or provided for. The greater such expenses the less that is left for the general creditors and consequently the less that is available for the preferential creditors. So far as there were insufficient assets after the expenses of the winding up had been paid or provided for to enable the preferential debts to be paid in full, section 2 of the 1897 Amendment Act and its successors made them payable out of the assets subject to the floating charge.
58. But section 2 and its successors did not authorise any of the costs and expenses of the winding up to be paid out of the assets subject to the floating charge, nor was there any reason for them to do so. Of course, if there were insufficient free assets to meet the expenses of the winding up in full, there would be nothing left to meet the preferential debts, and the whole of those debts would fall to be paid out of the assets comprised in the floating charge. There would also be nothing with which to pay the balance of the expenses of the winding up. Like the debts due to the ordinary unsecured creditors these would remain unpaid. But so they would before 1897: James LJ had already drawn attention to the fact that those who render services to an insolvent company or person frequently find that they have to go without payment, a result which did not strike him as unjust: see the Regents Canal case 3 Ch D 411, 426. If this was a hardship, it was not one which the 1897 Amendment Act was intended to remedy. Its purpose was to provide a secondary fund for the payment of the preferential debts, not to relieve liquidators by making new provision for the payment of the costs of a winding up at the expense of the holder of a floating charge.
59. Section 3 of the 1897 Amendment Act applied if, and only if, (i) a receiver was appointed under a floating charge; or (ii) possession was taken by or on behalf of the charge holder of any property comprised in such a charge; and (iii) the company was not at the time in course of being wound up. In such a case preferential debts were made payable out of any assets coming to the hands of the receiver or charge holder in priority to any principal and interest secured by the charge. The section also provided that any payments to preferential creditors should be recouped as far as might be out of the assets available for general creditors.
60. Section 3 is now reproduced partly in section 40 of the 1986 Act (where a receiver is appointed) and partly in section 196 of the Companies Act 1985 as substituted by Schedule 13 Part 1 of the 1986 Act (where possession of any of the charged assets is taken by or on behalf of the charge holder).
61. The effect of sections 2 and 3 of the 1897 Amendment Act taken together was to make the company's free assets the primary source for the payment of preferential debts but only after the costs of winding up the company had been paid or provided for. To the extent that such free assets were insufficient to pay the preferential debts in full, the balance of such debts (but not unpaid liquidation expenses) was payable out of the assets comprised in the charge in priority to the principal and interest secured by the charge. Any such payment would reduce the amount available for the discharge of the debt secured by the charge and might leave it partly or wholly unpaid. The receiver's duty (or that of the charge holder who had taken possession of the charged assets) was to pay the preferential debts "forthwith"; and it was possible that they would be paid out of the assets comprised in the charge even though it later appeared that there were free assets available out of which they ought to have been paid. In such circumstances the charge holder, to the extent that the secured debt was not discharged, was entitled to recoup such payments by participating in the distribution of the company's free assets in the winding up after the expenses of the winding up had been paid or provided for.
The costs of realisation
62. In considering the incidence of the costs and expenses of the winding up it must be borne in mind that there are two distinct funds: (i) the proceeds of the free assets which belong to the company and are administered by the liquidator in a winding up and (ii) the proceeds of the assets comprised in a floating charge which belong to the charge holder to the extent of the security and are administered by the receiver. In principle, and save to the extent, if any, that statute may make provision to the contrary, the costs of administering each fund are borne by the fund in question. In principle, therefore, the expenses of a winding up are borne by the assets comprised in the winding up, that is to say the company's free assets, and the expenses of a receivership are borne by the assets comprised in the floating charge.
63. The costs of realising a particular property, however, must be distinguished from the general expenses of the winding up or receivership. The costs of realisation are deductible from the proceeds of the property realised, whether it is realised by the liquidator or the receiver, for it is only the net proceeds of the property which are comprised in the winding up or receivership as the case may be. Costs incurred in preserving an asset are treated in the same manner. The costs of preserving or realising assets comprised in a floating charge, if incurred by the liquidator, may therefore be recouped by him out of the charged assets in priority to the claims of the charge holder: see the Regents Canal case 3 Ch D 411, 427.
In re Barleycorn Enterprises Ltd
64. These principles were well understood before Barleycorn  Ch 465, but they were subverted by the decision of the Court of Appeal in that case, which decided for the first time that the costs of winding up a company were payable out of property comprised in a floating charge (which had crystallised when the company was ordered to be wound up) in priority to the claims of the holder of the charge.
65. The case concerned a company which went into compulsory liquidation after having granted its bank a floating charge over the whole of its undertaking. At the date of the winding up order its assets amounted to £4,744. Preferential debts amounted to £5,161; the debt secured by the floating charge amounted to £6,972, of which £3,000 represented money advanced for wages and was included in the figure of £5,161.
66. On any view the preferential debts exhausted all the assets. There was nothing left for the general body of unsecured creditors or for the bank as the holder of a floating charge. There was no advantage to be gained by appointing a receiver or taking possession of the charged assets and the bank did not do so. The Official Receiver instructed a firm of chartered accountants to prepare a statement of affairs for the purpose of the winding up. This was a proper expense of the winding up, and the question (as formulated by Lord Denning MR) was whether it ranked behind the preferential debts and the claims of the bank, or whether it came first. The Court of Appeal held that it came first and was payable in priority to the preferential debts.
67. It may be observed in passing that this ruling was exclusively at the expense of the preferential creditors. On any view the bank was due to receive nothing by virtue of its security. The Court of Appeal's decision had the result that a statute passed for the benefit of the company's workers could well benefit the liquidator (by enabling him to recoup his expenses of administering one fund by taking them out of another for the administration of which he was not responsible) without benefiting the workers at all. A curiosity of the case is that there would have been no answer to the accountants' claim if they had persuaded the bank to release its security, which was worthless. But the bank would no doubt have refused to do so, since it was also the largest single preferred creditor.
68. Lord Denning MR, with whose judgment Sachs and Phillimore LJJ agreed, acknowledged, at p 473, that in the 1883 Act the word "assets" meant only the company's free assets, and that "in those days" when a floating charge crystallised on a winding up the property comprised in the charge did not belong to the company but to the charge holder. If the floating charge covered all the property of the company the charge holder took it all, subject only to the costs of realising it. But, he said, in 1888 and 1897 Parliament began to use the word "assets" in a different sense to include not only the free assets but also all those assets which were subject to the floating charge. It used the words in this new sense in the statute which created, for the first time, preferred payments in a winding up.
69. Although it does not affect his reasoning, Lord Denning's chronology was at fault and his references to 1888 and the 1888 Act were a slip. Preferential payments were created for the first time in corporate insolvency by the 1883 Act, not the 1888 Act; and if Parliament gave such payments priority over the floating charge it was by the 1897 Amendment Act, not by the 1888 Act which merely re-enacted the 1883 Act. But nothing turns on this.
70. Lord Denning acknowledged that it was "unusual" (a better word might have been "unprecedented" or even "heretical") to interpret a later statute as changing the meaning of a word in an earlier one without changing the word itself but, he said, this was necessary in order to make sense of the legislation as a whole. He cited the then current section 319 of the 1948 Act and emphasised the word "assets" in subsections (5)(a) (now section 175(2)(a) of the 1986 Act) and (6) (repealed by the 1986 Act and replaced by the insertion of the words "after the expenses of the winding up" in section 175 (2)(a)). He contrasted the word "assets" with the expression "the assets of the company available for payment of general creditors" in subsection (5)(b) (now section 175(2)(b) of the 1986 Act). These passages, he said, showed that since 1897 the holder of a floating charge could no longer sweep up all the company's property for his own benefit. The costs and expenses of the winding up had to be paid before the charge holder took any of it. Accordingly, he ruled, the order of payment was: (i) the costs of the winding up; (ii) the preferential payments; (iii) the bank as holder of the floating charge; (iv) the unsecured creditors.
71. This is certainly the correct order of payment out of the company's free assets. These fall to be administered by the liquidator in the winding up and unless otherwise provided the costs of administering them are payable out of them in priority to the claims of creditors. But there was nothing in the 1897 Amendment Act or section 319 of the Companies Act 1948 to make them payable out of the charged assets.
72. With all respect to Lord Denning, I think that his reasoning was based upon a misreading of section 319. He recognised that the "assets of the company available for payment of general creditors" means the company's free assets; they cannot possibly include assets which have been charged in favour of a third party and which are consequently not available for payment of general creditors. By contrasting this expression with the use of the word "assets" alone in subsections (5)(a) and (6) he evidently reasoned that the latter expression included the charged assets also.
73. In the context of a winding up the most natural meaning of the words "the assets" is "the assets of the company being wound up", that is to say its free assets. Once the words are extended to include assets charged in favour of a third party by way of security it is difficult to see why they include assets subject to a floating charge but not a fixed charge. But in fact a close analysis of section 319 shows that the word "assets" in subsections (5)(a) and (6) means the company's free assets.
74. Subsection (5)(a) explains how the preferential debts are to rank among themselves. It is ancillary to subsection (1), which directs that in a winding up certain classes of debts are to be paid in priority to all other debts. This carries the necessary implication that they are payable out of the same fund, for unless the debts are competing with one another for payment out of the same fund there can be no question of priority between them. The "other debts" of the company are payable exclusively out of its free assets; and a direction that preferential debts must be paid in full in priority to them unless "the assets" are insufficient to meet them is a direction to pay them in full in priority to the other debts unless the assets out of which they are both payable, i.e. the free assets, are insufficient to meet them.